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Week 6 assignment Please submit your answers electronically (to your assignment folder). This assignment is worth 100 points. Chapter 15: Money Creation 1. The banking system used today is a (total, fractional) _______ reserve system, which means that (100%, less than 100%) _______ of the money deposited in a bank is kept on reserve. 2. When a person deposits cash in a commercial bank and receives a checkable deposit in return, the size of the money supply has (increased, decreased, not change) ________. 3. The excess reserves of a commercial bank equal its (actual, required) ________ reserves minus its (actual, required) _______ reserves. 4. When a commercial bank deposits a legal reserve in its district Federal Reserve Bank, the reserve is (a liability, an asset) _______ to the commercial bank and a(n) (liability, asset) _______ to the Federal Reserve Bank. 5. When a commercial bank makes a new loan of $10,000 the supply of money (increase, decreases) ________ by $10,0000. When a commercial bank buys a $10,000 government bond from a securities dealer, the supply of money (increases, decreases) _______ by $10,0000. 6. A commercial bank has actual reserves of $9,000 and liabilities of $30,000, and the required reserve ratio is 20%. The excess reserves of the bank are A. $3000 B. $6000 C. $7500 D. $9000 7. The commercial banking system has excess reserves of $700, makes new loans of $2100, and is just meeting its reserve requirements. The required reserve ratio is A. 20% B. 25% C. 30% D. 33.33% 8. A commercial bank has excess reserves of $500 and a required reserve ratio of 20%; it grants a loan of $1000 to a borrower. If the borrower writes a check for $1000 that is deposited in another commercial bank, the first bank will be short of reserves, after the check has been cleared, in the amount of A. $200 B. $500 C. $700 D. $1000 9. The commercial banking system, because of a recent change in the required reserve ratio from 20% to 30%, finds that it is $60 million short of reserves. If it is unable to obtain any additional reserves it must decrease the money supply by A. $60 million B. $180 million C. $200 million D. $300 million 10. Only one commercial bank in the banking system has an excess reserve, and its excess reserve is $100,000. This bank makes a new loan of $80,000 and keeps an excess reserve of $20,000. If the required reserve ratio for all banks is 20%, the potential expansion of the money supply from this $80,000 loan is A. $80,000 B. $100,000 C. $400,000 D. $500,000 11. If the dollar amount of loans made in some period is less than the dollar amount of loans paid off, checkable deposits will A. Expand and the money supply will increase B. Expand and the money supply will decrease C. Contract and the money supply will increase D. Contract and the money supply will decrease Questions 12 through 14 are based on the following three balance sheets for a commercial bank. The require reserve ratio is 20%. Ignore vault cash in each question. (1) (2) (3) Assets: Cash $10 $20 $20 Reserves 40 40 40 Loans 100 100 100 Securities 50 60 70 Liabilities and net worth: Checkable deposits 175 200 180 Stock shares 25 20 50 12. Computed the required reserves for each of the three balance sheets (columns). 13. Compute the excess reserves of the bank in each of the three cases. If the bank is short of reserves and must reduce its loans or obtain additional reserves, show this by placing a minus amount in front of the amount by which it is short of reserves. 14. Compute the amount of new loans the bank can extend in each case. 15. Define the meaning of excess reserves. How are they calculated? Chapter 16: Interest Rates and Monetary Policy 16. The goal of monetary policy in the United States is to achieve and maintain stability in the (price level, tax level) _______, a rate of (full, partial) _______ employment in the economy, and economic growth. 17. When the quantity of money demanded exceeds the quantity of money supplied, interest rates (increase, decrease) ________ and bond prices (increase, decrease) _______. 18. The two important assets of the Federal Reserve Banks are (Treasury deposits, government securities) ________ and (reserves of, loans to) ________ commercial banks. The three major liabilities are (Treasury deposits, government securities) ________, (reserves of, loans to) _______ commercial banks, and (government securities, Federal Reserve Notes) _______. 19. If the Federal Reserve Banks were to lower the discount rate, commercial banks would tend to borrow (more, less) _______ from them, and this would (increase, decrease) _______ their excess reserves. 20. The interest rate that banks charge one another for overnight loans is the (prime interest, Federal funds) _______ rate, while the rate banks use as a benchmark for setting interest rates on loans is the (prime interest, Federal funds) _______ rate. The (prime interest, Federal funds) _______ rate is the focus of the monetary policy of the Federal Reserve. 21. To eliminate inflationary pressures in the economy, the traditional views holds that the monetary authority should seek to (increase, decrease) _______ the reserves of commercial banks; this would tend to (increase, decrease) ________ the money supply and to (increase, decrease) ________ the rate of interest. This in turn would cause investment spending, aggregate demand, and GDP to (increase, decrease) _______. This action by monetary authorities would be considered a(n) (easy, tight) ________ money policy. 22. Monetary policy has shortcomings and problems as well. If may be subject to timing (limits, lags) _______ that occur between the time a need is recognized and the policy takes effect. It may be more effective in counteracting (recession, inflation) ________ than (recession, inflation) _______. 23. An increase in the rate of interest would increase A. The opportunity cost of holding money B. The transactions demand for money C. The asset demand for money D. The prices of bonds Questions 24 and 25 are based on the following table. Suppose the transactions demand for money is equal to 10% of the nominal GDP, the supply of money is $450 billion, and the asset demand for money is that shown in the table. Interest Rate Asset demand (billions) 14% $100 13 150 12 200 11 250 24. If the nominal GDP is $3000 billion, the equilibrium interest rate is A. 14% B. 13% C. 12% D. 11% 25. If the nominal GDP remains constant at $3000 billion, an increase in the money supply from $450 billion to $500 billion would cause the equilibrium interest rate to A. Rise to 14% B. Fall to 11% C. Fall to 12% D. Remain unchanged 26. Assuming that the Federal Reserve Banks sell $20 million in government securities to commercial banks and the reserve ratio is 20%, then the effect will be A. To reduce the actual supply of money by $20 million B. To reduce the actual supply of money by $4 million C. To reduce the potential money supply by $20 million D. To reduce the potential money supply by $100 million 27. The total quantity of money demanded is A. Directly related to nominal GDP and the rate of interest B. Directly related to nominal GDP and inversely related to the rate of interest C. Inversely related to nominal GDP and directly related to the rate of interest D. Inversely related to nominal GDP and the rate of interest 28. Lowering the reserve ratio A. Increases the amount of excess reserves banks must keep B. Changes require reserves to excess reserves C. Increases the discount rate D. Decreases the discount rate 29. What are the characteristics of an expansionary monetary policy? How does the Federal Reserve implement such policies? 30. What are the characteristics of a restrictive monetary policy? How does the Federal Reserve implement such policies? 31. What are the major strengths of monetary policy, particularly in comparison to fiscal policy?